Answers to questions that are top of mind for institutional investors
President and Chief Investment Officer, Bentall Kennedy (U.S.), a Sun Life Investment Management company
How will U.S. commercial real estate perform in a slower economic cycle? Could changes in government policy cause an impact?
The U.S. commercial real estate market is the largest in the world and remains relatively attractive. That's something we're hearing firsthand from our global clients.
Fundamentals remain strong, and we don't see political or policy changes having a significant near-term impact on U.S. commercial real estate. We are indeed dealing with some uncertainty that impacts the U.S. property markets, but with Brexit and potential government changes in Europe, that uncertainty is global and not confined to the U.S. alone.
With solid fundamentals leading to rising operating income in many markets and U.S. interest rates likely to remain low on a historical basis – yet relatively high on a global scale, real estate remains a compelling investment alternative. It is a resilient, income-driven asset class, with attractive spreads over fixed income and good diversification benefits to the equity markets.
We are late in the market cycle, so we're seeing a shift toward more defensive strategies, with a focus on core real estate in major markets, and value-add where there's a clear opportunity to add value through leasing and operations. We're looking for assets with a strong income component and long-term appreciation potential. Even as job growth slows, there will be select markets that should outperform.
In particular, growth will continue to be strong in urban innovation, technology and higher-education hubs found in select large and mid-sized cities. The growth in these communities is being driven by the large millennial cohort that is moving into core urban areas with attractive job opportunities that also offer a range of amenities – entertainment, recreation, health-oriented facilities, good transit – and residential options at different price points.
This, in turn, is having a pronounced impact on where many employers are locating. The most talented millennials aren't willing to move out to large suburban corporate campuses for work. So central city live/work/play environments are now where the talent is, and employers are moving in to compete for the best and the brightest. With the move to core innovation hubs being driven by the youngest and most dominant generation in the workforce, we believe that the growth in these key areas will be strong and sustainable for the long term.
And unlike 1999 and 2008, when real estate was overbuilt and over-leveraged, the asset class today is well-positioned to withstand an economic slowdown or downturn. These may be uncertain times, but we believe real estate remains a good asset class to be exposed to, with low volatility, enhanced yields, and a low correlation to bonds and equities.
Amy Price is President and Chief Investment Officer, Bentall Kennedy (U.S.) Limited Partnership. Bentall Kennedy, a Sun Life Investment Management company, is one of the largest global real estate investment advisors and one of North America's foremost providers of real estate services. Bentall Kennedy serves the interests of more than 550 institutional clients and investors across office, retail, industrial and multi-residential assets throughout the U.S. and Canada. To read Amy's full bio click here.
What has been on your mind? If you have a question for Amy please email her at APrice@Bentallkennedy.com.
This article is intended for U.S. institutional investors only. It is not for retail use or distribution to individual investors. The information in this article is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information contained in this article. All opinions and commentary are subject to change without notice and are provided in good faith without legal responsibility.
© 2017, Bentall Kennedy (U.S.) Limited Partnership.